Friday, October 10, 2014

Market Week Wrap-up

Volatility shook
global markets this week, severely testing the long equity rally. Wednesday saw
the biggest one-day gain of the year in the S&P500 and Thursday marked the biggest
decline in the index since April. The VIX volatility index moved sharply
higher, topping 20 for the first time since February. The downside ramp got
underway thanks to disastrous German industrial data published on Monday and
Tuesday. German August factory orders data declined 5.7% m/m (the biggest m/m
drop since early 2009), led lower by a big slide in overseas orders. German
August industrial production declined 4% m/m, much more than expected. In
addition, the IMF cut its 2014 global growth forecast to from +3.4% to +3.3%
and its 2015 forecast from +4.0% to +3.8%. The DJIA and S&P500 were down
2.5% a piece by Wednesday morning, and participants read deeply between the
lines of the FOMC minutes to uncover the possibility of the Fed holding off on
rate hikes longer, driving a sharp reversal. The sugar high didn't last, and
markets closed at the lows of the week (or much lower, in the case of the
Nasdaq, which is right at its 200-day moving average). Ebola fear spread to new
corners of the globe all week - the first confirmed transmission of the virus
outside of Africa struck a nurse in Madrid - but nearly all the reports were
false alarms. For the week, the DJIA dropped 2.7%, the S&P500 fell 3.1% and
the Nasdaq lost 4.5%, the worst week for the tech index since May 2012. After
the cash close on Friday, S&P futures saw another spike in volatility
around the 1900 mark, rallying 6 handles before falling nearly 10 points in the
final minute of index futures trade to close on the lows, portending more volatility
in stock trading Monday, when the bond market is closed for Columbus Day.

The FOMC minutes were the real catalyst for Wednesday's short-lived rally,
although the absence of any surprises in the report may have been the real good
news. Many observers were drawn to comments in the minutes about the possible
downside risks from dollar appreciation and weak global growth, although more
savvy analysts pointed out that Fed Chair Yellen had also cited these as
possible downside risks at her post-decision press conference at the September
FOMC meeting. While it is true that explicit comments about the impact of
dollar FX movements are somewhat rare for Fed officials, it's also worth noting
that the moves in the dollar have been rather sharp recently. On Thursday, Fed
Vice Chair Fischer said that the central bank must take into account the impact
of the dollar on aggregate demand, and also said the issue would be discussed
at the next FOMC meeting.

As portended last week, the IMF cut its 2014 global growth forecast to from
+3.4% to +3.3% and its 2015 forecast from +4.0% to +3.8%, citing eurozone
recession risks and emerging market slowdown. The outlook for the global
economy has darkened and the IMF sees a more than one-in-three chance the
eurozone will slide into its third recession since the financial crisis. The
IMF maintained its China 2014 GDP forecast at +7.4% (nearly in line with
China's official 7.5% forecast), and raised the US 2014 forecast from +1.7% to
+2.2%.

On Thursday, WTI crude was drilled down to $83.55, its lowest level since last
June and Brent tested lows last seen in late 2011, near $88/barrel. The slide
continues to be driven by oversupply concerns and the possibility of flagging
demand from battered economies, exacerbated by dollar strength. More proximate
catalysts included the weekly API inventory report, which showed the biggest
weekly build in crude inventories since April. Further analysis regarding Saudi
Arabia's price reductions last week suggested the moves were aimed at boosting refinery
margins in Asia and were not the opening move in an OPEC price war.
Additionally, there was a report that crude priced below $90 a barrel would
render drilling for oil in some shale formations uneconomical, starting with
the Bakken region.

The crisis in Hong Kong dimmed considerably after the authorities in the
enclave agreed to hold talks on Friday with student protestors over changes to
the local election laws that had sparked the unrest. Just a day before talks
were to begin, Hong Kong Chief Secretary Carrie Lam cancelled the negotiations
claiming they had been undermined by attempts to start a new civil disobedience
campaign to pressure the Hong Kong anti-graft agency to probe a payment of
$6.4M to Hong Kong's leader C.Y. Leung. By Friday, large crowds of students
were back out on the streets of Hong Kong.

Alcoa started the earnings season off on a positive note, reporting strong
third-quarter earnings, boosted by higher aluminum prices. Both earnings and
revenue widely topped expectations - EPS gained 70% y/y - while margins and
operating income were up significantly. Most components of the firm's FY14
outlook were unchanged, although it notably brightened its forecast for North
America commercial transport market.

Samsung Electronics disclosed ugly preliminary third quarter results. Samsung
warned operating profits would fall 60% y/y as the company's smartphone sector
struggles to cope with increased competition. Sales guidance was down more than
20% y/y. Mobile devices are the key driver of the company's profits, and its
second quarter profit fell 20% y/y for much the same reasons.

Semi names were short circuited on Friday after Microchip Technology reportedly
preliminary second quarter revenue results that fell short of both consensus
expectations and the company's own guidance. The company said September is
usually strong, but this year expected sales did not materialize. The revenue
miss was led by China, where the September quarter is traditionally the
strongest. Microchip CEO Sanghi said "We believe that another industry
correction has begun and that this correction will be seen more broadly across
the industry in the near future."

Shares of Sears Holding declined 13% this week on reports that insurance firms
were cutting coverage of Sears trade credits, prompting at least one suppler to
halt shipments to the company. Sears would neither confirm nor deny the report,
and emphasized its significant financial flexibility. Elsewhere in the annals
of insolvency, GT Advanced Technologies filed Chapter 11 bankruptcy. The firm
is exiting its sapphire manufacturing operation after a failed effort to
produce the material for Apple's smartphone screens.

Activist investors made a splash this week in shares of Darden and Apple. Carl
Icahn renewed his call for Apple to launch a $100B tender offer for shares, as
part of a long, rambling letter to Tim Cook that read mostly like fan fiction.
Icahn said he had not sold a single share of his stake. Just a month after
releasing its infamous slide deck detailing Olive Garden's corporate and
culinary failures (too many breadsticks, no salt in the pasta pots), activist
fund Starboard won its proxy fight with Darden and replaced all 12 of the
company's directors with its own nominees.

After closing in on 1.2500 last week, the dollar eased up through Thursday
morning, with EUR/USD trading almost back to the 1.2800 handle. The pair turned
around and closed out the week around 1.2620. The 1.2400 level is a key
psychological point for EUR/USD, as it was there that ECB President Draghi made
his famous "whatever it takes" pledge back in July 2012.

The monetary policy statement from the Bank of Japan reiterated its overall
economic assessment of "moderate recovery as a trend", but also
lowered its view of industrial production. The BOJ cited inventory adjustment
among the reasons for output "showing some weakness". One of the
BOJ's more dovish voters, Sayuri Shirai, also added a dissent on the inflation
component of the statement, calling for greater acknowledgement of an increasing
number of price indicators turning flat. The dissent is symbolic in that this
week's decision serves as a precursor to the late-October meeting, when the
central bank will offer its semi-annual revisions to near-medium term
projections for growth and inflation. Also of note in Japan, the government's
economic officials have turned more mixed on the rapid depreciation of the Yen,
citing more limited positive impact on exports against the negative
implications for some of the domestic industries. USD/JPY has certainly heeded
that change in sentiment, falling by its biggest weekly margin in over a year.

The Shanghai Composite returned from an extended break and finished the week
flat. The mainland property sector remained supported by the latest PBoC
measures to ease eligibility criteria for preferential "first home
mortgages", but the focus next week will turn to September trade, lending,
and inflation data. As Beijing prepares for the 4th party Plenum, the
government's official 7.5% GDP target for 2014 is coming into question. Just
this week, the World Bank lowered its China 2014 growth estimate to 7.4%,
matching the forecast maintained by the latest IMF projections. China Academy
of Social Sciences think tank also warned that 2014 GDP could slow to 7.3%, as
the government accelerates "various reforms to move toward healthier
growth." The latest Q3 GDP figures are scheduled to be released later this
month on October 20th.TradeTheNews.com